All posts tagged subsidiarization

It seems increasingly likely that one part of the solution to dealing with the problem of banks which are deemed too big to fail will be that they are forced to operate outside their home markets as subsidiaries, rather than branches of the parent bank. It’s a process known as “subsidiarization.”

Subsidiaries are stand-alone entities with their own capital and liquidity pools which ensure they can withstand losses on investments and have enough cash to meet their payment obligations for a certain period into the future. Domestic regulators are able to oversee and set the size of these pools so they can try to make sure the companies can weather financial storms and don’t go bust holding domestic depositors’ cash.

In the European Union, however, this solution clashes with a fundamental principle underpinning the region’s single financial market, known as “passporting”. This gives a bank in one country in the region the right to operate in another as a branch with prudential regulation, including the setting of capital and liquidity levels, handled by their home regulator.

The weakness of the E.U.’s passporting system was put into sharp relief when the U.K. government had to compensate depositors who had invested in four Icelandic banks – two of which operated in the U.K. as branches – that failed in 2008 even though the U.K.’s Financial Services Authority had no say over their capital and liquidity levels.

The U.K. parliament’s Treasury Committee, which analyzes financial sector issues, has now added its weight to calls for the E.U. to allow countries in the region to force banks to become subsidiaries. In a report published Monday, the committee said the E.U. should consider amending the Maastricht Treaty to give national regulators the power to force banks to set up as stand-alone subsidiaries.